Kevin Cumbus

Hello and good evening. Welcome and thank you for joining us, I’m Kevin Cumbus, President and Founder of TUSK Practice Sales, and I am joined tonight with Josh Swearingen, Director here at TUSK, who really heads up most of our efforts around dermatology. Tonight, we’re going to spend some time understanding the market that we saw in 2025 and what we’re likely to see in 2026. We’re going to look at the broader economy, right? We’re going to look at interest rates, we’re going to look at inflation and how that’s driving investor sentiment, and then we’re going to dig a little deeper and specifically focus inside the business of dermatology.

For all of you here in the audience today that own dermatology practices or invest in dermatology practices, you’re in a good place. Valuations inside of this world have been remarkably strong. You’ve seen an initial wave of acquisitions in the past. We’re now in that second wave, and there’s, as we see it, a lot more value to be created as investors begin to stack businesses like dermatology, plastic surgery and medical aesthetics. So we’ll be certain to touch on that as well.

Kevin Cumbus

But before I go on any further, quick introductions. So, I’m Kevin Cumbus again, little bit of background. Spent 10 years in finance and investment banking, both in New York and down here in Charlotte before getting involved in the healthcare economy and worked as a broker, selling practices in doctor-to-doctor transactions. Worked for one of the largest dental MSOs, or DSOs, in the nation, saw them through an exit to Berkshire Partners for close to a billion dollars. Built and sold a dental practice, and now, for the last 10 years, have been working here, supporting sellers and entrepreneurs who built healthcare businesses that want to sell to either private equity companies or MSOs backed by private equity companies.

So, I’m joined here with Josh today. Josh has spent the year around the nation going to conferences, meeting with buyers, talking with investors, talking with entrepreneurs like yourself, and speaking on stage. So, I’m so happy to have Josh here so he can share his, let’s call it, unvarnished truth about what’s really going on, Josh, it’s so good to see you.

Josh Swearingen

Well, thank you for including me in this. It’s great to be here. My name is Josh Swearingen. I operate largely in the medical aesthetic space, so derm, plastics, and med spa, and then also in the dental space as well. I have about 20 going on, 25 years of experience in the healthcare space, starting with a national distributor, working in their group practice division, and then running a couple of different MSOs, one of which, we helped build and take to market and sell off to a private equity backed group. And then I had a brief stint working on the buy side. So, for a large national MSO, had a chance to go out and buy practices similar to yours, and kind of integrate them into our existing business. So, I can tell you that I really, really enjoy representing the sellers versus working for the buyers. It’s far more personally rewarding. And I’ve been here at TUSK for four years, and just have an absolute blast here.

Kevin Cumbus

It’s been a fun four years, Josh, and so much has happened. It’s an ever-changing, dynamic market driven by so many things, right? There’s interest rates, there’s buyer sentiment and change, and there’s what do the private equity companies want? But at the end of the day, it’s really all about the operator and the entrepreneur that we get to work with. And look, it has been a challenging operating environment, we don’t want to ignore that, but I think our purpose tonight is to really provide you education and information. We want everyone on this call to build a business that’s built to sell irrespective of whether or not you ever sell it and let you really make you aware of all the options that you have. And I’ll end by saying this, you got a lot of good options in today’s market.

Kevin Cumbus

I get asked a lot what’s different about TUSK relative to other advisors in the space? Number one, it’s the quality and talent of the individuals that we get to work with, and they get to work with our clients each and every day. Long histories and investment banking, private equity, operations. We have former CEOs and COOs of MSOs throughout the nation, and multiple individuals who worked on the buy side, just like Josh referenced, who really understand the way private equity thinks about capturing a return, and frankly, some of the tricks that are used tricks of the trade, it’s just what they are, to have the doctors frankly, accept less value for their business, and in many cases, retain too much risk. So, I think I know we have the best team in the business and just excited to get to work with these guys and gals each and every day.

Kevin Cumbus

We’re no we’re no rookies to this. We’ve been around for 10 years now. We’ve done about $1.3-$1.4 billion worth of transactions and over 200 deals collectively in our entire career, not just here at TUSK. So, as we say around here, we’re all in. We’re all in on healthcare, the medical aesthetic space, dental, behavioral I mean, we’re just a lower middle market healthcare focused, sell side advisor.

Couple of things that make us difference. We only work for the seller. We don’t accept fees from buyers. There are some brokers out there, they’ll say, “I’ll do your deal for free. Let me just introduce you to these, these five buyers,” which represents a tiny fraction of the market, and they get paid by the buyer. Look, you get one chance to do this. You get one chance to sell your life’s work. Even if you decide that for some reason or another, we’re not the right fit for you, I would strongly encourage you to find someone who’s exclusively paid by their client as a sell side advisor.

Number two, we have a team-based approach here, where every one of our clients is going to be assigned at least three people to work with across each one of our functional areas. It provides redundancy and consistency and specialization that we can offer and others cannot. So that’s a truly gold star for our clients.

And then finally, we really do a customized white glove go to market strategy based on what you want. Now, people will come to Josh and say, “I really want to do a private equity deal. I’ve got $5 million of EBITDA, I’ve got a great, seasoned leadership team, and we feel like we should be a private equity platform,” and we said that that’s wonderful, we love that, you may very well be right, but let us expose you to the rest of the market to make sure that you found the perfect partner. You see, these deals aren’t just sales, right? They’re partnerships, and in many cases, the private equity company or the MSO, is investing a sizable chunk of cash, typically funded by debt, into your business that you to put in your bank account. But you’re going to have to continue to operate in that business, post-close. So, we got to make sure that, yeah, the economics are good, the operational you’re doing what you want to post-close, and that the equity is going to be worth something, and that emotionally, culturally, you’re happy to be there. So, it’s a custom crafted approach each and every time to meet the needs of our clients, and, frankly, challenge their assumptions a little bit.

Josh Swearingen

And I would just add on to that real briefly. You know, I think it’s always interesting to me, you know, our goal at the front end is to have a really, really good understanding, number one of the business, but even more importantly, what your goals are as a prospective seller, and what you’re looking for long term, which Kevin just, just mentioned. And I really think that it’s interesting, because we’ll often get into transactions and get into the middle of them, and I’d say 90% of the time, our clients don’t ultimately pick the highest value offer or really an offer that is commensurate with what they explained to us they were looking for at the front end. And it’s only it’s only after getting exposed to all of the opportunities that are out there, and all of the potential options as buyers that are out there. It’s only after that that you can really formulate the perfect fit for you, and we’ll do everything we can on our end to make sure that the deal value goes as high as possible and make sure that you’re getting everything you’re looking for. But at the end of the day, you know, it’s a learning process all the way through it, and having the opportunity to speak to 5, 6, 7, sometimes 10, different buyers will really help you refine what you’re looking for and find that perfect fit for the next stage of your career.

Kevin Cumbus

Josh, I remember, I’m reflecting on the deal we did up in New York, that it was probably $6 million North of EBITDA, and when we worked with the client, I remember telling them, “If you don’t change your mind five or six times, we haven’t done our job.” Right and so I think it’s hard to really appreciate that, but you want to go through all the iterations and kind of envision yourself in each one of these businesses, with each one of these investors, and it, you know, it went down just the way we thought it would. Our client said, “Oh, I can’t believe you said it and actually happened, but I changed my mind more than six times over the course of this relationship.”

Josh Swearingen

And ultimately, at the end of the day, I think we all believe they found the perfect fit and are in a situation that couldn’t be any more well suited for ultimately, the long-term goals that they had. So, it’s a very rewarding experience from our perspective and you should be able to walk out of the process feeling really, really good about the decisions that you’ve made.

Kevin Cumbus

Yeah. One more differentiating factor here, it is not uncommon for brokers in this space to get your deal to an execute a letter of intent and disappear when they say, “Well the attorneys have it from here.” The reality is a letter of intent probably has 16 to 22 deal points, and they’re big deal points. They’re super important. But you’re about to go into a quality of earnings process post execution of a letter of intent, and then you’re about to go through a legal process to negotiate documents that, if printed, could be 4, 5, 6, inches tall. Uh, yeah, and there’s hundreds of additional business decisions and negotiations that happen during that negotiation with the law firms. So, we know that our value really starts to show up for our clients post LOI, and we’re elated to get to do that. And was talking with Alex just the other day about how many times his work has more than paid for our fees through the quality of earnings process. So, I thought that was pretty incredible.

I think the short story Josh is we do it the hard way, right? Every deal is going to be 100+ hours because it’s the right way, and we treat it like our business or our parent’s business or our best friend’s business, because we know what it takes to build dermatology businesses like this. And when someone decides to work with us, it is a privilege and an honor that we take very, seriously.

Kevin Cumbus

All right, Josh, that was great. Now that everybody kind of knows who we are and what we do, I think we should talk about the economy a little bit and really what’s going on in the world of dermatology. Private Equity has been investing inside of this economy for a long, long time, but I think it bears repeating why private equity is interested in dermatology businesses the first place, and how private equity companies are actually constituted.

Let’s start why are they interested in healthcare? It’s pretty straightforward. One it’s a fragmented market. Dermatologists have the ability, the unique ability, to open up a business post-graduate school, and patients show up. There is high demand for your services, and you can open up a single location, you can partner up with a bunch of other doctors, but we typically see small groups in markets throughout the US, and there’s no big, major, large syndicate of providers. Well, that’s what private equity is trying to solve for, because there’s good financial reasons for doing that. They like to go into markets where there’s a high barrier to entry. It is not easy to become a dermatologist. You guys have done it. It is a very, very high bar, and as a result, that’s why you’re so busy. So, I want to invest in businesses that are castles surrounded by moats. And that’s really what dermatology is. The castle is the cash flow, and the moat is this degree that you all have, which makes it very, very hard for someone to compete with you, unless they’ve gone through the same rigorous schooling.

Next, we want to see high margin, and preferably something that’s recession resistant or recession proof. Listen, if I have a mole on my body, I’m going to get it looked at. If there’s something that could end my life tomorrow, I’m going to go see my dermatologist, because I’d like to stick around and meet my grandkids. That’s the definition of being recession proof. So y’all are here, and you have a little bit of power on the pricing side.

There’s opportunities to renegotiate your rates with PPOs and drive those rates up, and that’s an opportunity for synergies and optimization of operations payers and marketing and technology. If you’re a solo provider out there, and I think about my father, who was a dentist down in Montgomery, you know, he worked extremely hard, he had 19 team members, and he only worked four days a week. He worked “with his hands” doing dentistry. And on that fifth day, he would go in, he’d run payroll, he’d clean up a little bit, and he’d get out of there. He’d reached the point of diminishing returns in his business, where he was enjoying enough cash flow that spending another day doing dentistry didn’t return him $1 that was, frankly, meaningful enough to him. So, he didn’t tighten the screws on costs or think about new marketing opportunities. And private equity sees that. They know that, and they said, “Doc, you do what you do, allow us to focus on the business of operations, marketing and technology drive more patients your way with more profitable procedures.” Josh, anything to add on private equity is looking for there?

Josh Swearingen

Yeah, just one thing, I think one of the things that that really plays in dermatology’s favors, you know, you’ve got your medical derm practice where you’re doing biopsies, you’re doing skin checks, you’re doing all of the above running a really nice high margin profitable business, but unlike a lot of other healthcare segments, you have one of the unique abilities to tag along a fee for service medical aesthetics practice right alongside it, and add in a lot of really nice high margin profitable services, really whenever you want, or whenever you decide you’d like to hire in, you know, a nurse injector, a nurse practitioner, or whomever. So, I think that one of the reasons that we’ve seen such a such a groundswell of interest in dermatology over the last several years is that there are a large percentage of medical derm practices that have not taken advantage of that, that private equity understands can be a huge growth opportunity for them.

Kevin Cumbus

It’s a great call out. We take deals to market and one of the questions we get asked in derm is, “How much med spa is there in the business?” And if it’s not there, they get really excited, because they know they can add it, they can add the EBITDA, and they can get a return on that investment. So, it’s like, if you don’t do it, the investor likely will. So, you might as well if you believe in it philosophically, and you believe it would be good for your patient base and your pocketbook, something you should certainly explore.

Kevin Cumbus

All right, so kind of private equity 101, so private equity are, they’re capitalists. They take investors’ money with the expectation that investor has that they’re going to get a return on that investment. Their dollars typically come from family offices, endowment, pension fund and high net worth individuals. And then when they have those dollars and complete raising that finally complete raising debt fund, they scour the market for opportunities to invest in. Maybe it’s HVAC businesses, or veterinary businesses, or, in this case, dermatology practices. They typically go in big right? So, it’s pretty expensive for them to diligence an opportunity, pay the attorneys to get it closed and pay the accountants to do a quality of earnings. We’re talking millions of dollars for that initial platform because of all the documentation that it takes and diligence that it takes. So, the first investment they’re making is typically called a platform. Platform investments used to be classified as maybe $5 million of EBITDA. In recent years, we’ve seen this come down, primarily for two reasons. One is, they’re just not that many $5 million EBITDA platforms out there anymore. And two, the demand for businesses like yours has grown to where, if they’re going to make an investment, they want to get in now, and if that means they got to invest in a $2 million EBITDA business, compared to a five, that’s a risk they’re willing to take and a cost they’re willing to take on, just to as they say, “get in the game.” Anything to just add on, anything on platform investments, Josh?

Josh Swearingen

I think maybe there’s obviously a financial qualifier for a platform investment. I think that the operational qualifier is, they’re looking for a business that they can build around. So, they’re looking for something that has, and the reason they’ve traditionally looked at more of a $5 million business is because it’s large enough to have an infrastructure built out. So if you’re interested in being an initial platform investment for a PE group, or you feel like that, that may be a path for you, really, what they’re looking for is some level of management infrastructure, inclusive of things like human resources and marketing, and maybe an office manager who runs an office team and things of that nature. So, think of an organization that that operates and is built to scale and add on additional locations. So, I think that’s probably the best way to think about it.

Kevin Cumbus

That’s awesome. All right, so after they made their investment in the platform and they’ve wrapped their hands around the business, it’s time to grow. Really two ways to grow a business, one is organically, which is by growing your revenues and in turn, growing your EBITDA. And the second way to grow is inorganically or growth through acquisitions. This is where most of the growth is going to happen. These businesses are capitalized through their capital raise, and also are very adept at using leverage, loans, debt, as a tool for cash at close, when they’re doing a transaction. Typically leverage ratios is going to run somewhere between 3-4.5, sometimes as much as 6 times EBITDA is going to be the debt on the balance sheet in these businesses. So, they need to run very, very quickly. So, they start out with the platform. They grow aggressively through acquisitions, and all the while operations is working on cost reduction, leveraging technology, now leveraging artificial intelligence, laying out the SOPs for operational excellence, and building scalable processes. They iterate, they refine, they dress this up, they go to market and the hope is that they’re going to do two things. One, they’re going to buy low, all these acquisitions that they’ve made over time. They’re going to look at their blended entry multiple, let’s say that’s six times all the EBITDA that they purchased. And then when they go to market and ultimately sell the business, their hope is that they sell for 12, 13, 14, times and enjoy an arbitrage between where they bought and where they sold.

Net, net, net, these investors that gave the money to the private equity companies are looking for a return somewhere in the order of 2-5, 2-10 times, would be great market somewhere around three to four. And they want to do it quickly. So, they’re going to do it in five years or less.

So that’s the plan, right? It’s always the plan. And what did Mike Tyson say? “Everybody’s got a plan that they get punched in the mouth.” So, it has not been going according to plan. Which the graph you see in front of you right now, is private equity backed healthcare, businesses by specialty or by segment. The furthest on the left-hand side is dental than mental health and home-based care and 1, 2, 3, 4, 5, 6 in is the graph for dermatology. The lighter blue bar shows the number of practices where private equity has been invested between five and seven years, keep in mind, it was a five-year plan. And that darker blue bar is where private equity has been invested for more than seven years in this MSO.

It’s been a choppy market, right? So, so how did we get here? Well, rates went crazy. The cost of debt went up. When the cost of debt goes up, my cash flow goes down. My bank says, “Hey, your debt service coverage ratios are out of whack, and we’re not going to lend you any more money for acquisitions.” So, you got to work on your business, not just buy additional businesses. Okay. Well, maybe if rates come down, things will get better. Yes, but they’re not going to fix the operational issues that were exposed in some of these businesses.

So right now, we’re at this interesting point in time where, let’s say businesses built in 2018, 2019, and 2020, could have been built under the assumption that interest rates are going to be low for a long, long period of time, and they could be straddled with debt, and frankly, have kind of turned into zombie MSOs, where they can’t buy additional locations, they’re trying to fix their business, and some of that equity is, frankly, going to be washed out, and we certainly don’t want any of our clients to partner with those MSOs.

On the other side, businesses that actually worked on their operations, strengthen their team and is able to survive covid and thrive on the other side of this, is going to be very well positioned to acquire practices on the other side.

Josh, I don’t know you tell me how many MSOs that were active in the derm market were pencils down? What percentage of the market do you think was pencils down over the last 24 months in derm?

Josh Swearingen

I’d say probably 30 to 40% of them were pencils down.

Kevin Cumbus

Yes, every industry is very different here. So, 30%-40% is down, and again, their goal is to be sold, ultimately, to a larger private equity company. They’re going to have to show that muscle and begin acquiring practices again, and we’ll brush up against this topic in a little later, but we are just about to say, I think we’re really kind of at the tipping point where those businesses that have made it, need to begin buying practices again. And the demand side of this M&A equation is really going to start to tick up. And as the demand side ticks up, valuations will tick up as well.

Josh Swearingen

Yeah, I actually want to touch on that a little bit. So yeah, every one of these groups has kind of an investment mandate, and it’s essentially the investment expectations that the private equity group has for the underlying MSO. And when capital gets more expensive and that that M&A activity drops off, those growth expectations don’t drop off. They’re not commensurate with market activity. They are commensurate with a five-to-seven-year cycle. So oftentimes, when you come out of a situation where you’ve got higher interest rates, you’ve seen activity drop off a cliff a little bit, and you’re starting to kind of rebound out of that, there’s this tremendous froth that is created because now all of a sudden, you have capital that needs to get spent because it’s cheaper, it can be utilized a little bit more efficiently, and you’ve got a lot of organizations that needed to be buying all along that have not been buying for the last year or two. So, I think that that is a really good signal for where the market is going to be over the next, probably 6 to 18 months.

I think jumping back even further a little bit. One thing that’s important to understand is that, you know, everybody looks at private equity as this giant basket of cash, and when, when they’re consummating these deals, in most cases, there is, there’s a relatively large cash component of it, but that cash is a mixture of capital that the private equity group has on hand and in larger part capital that they are going to borrow from some sort of a lending institution, which is directly impacted by interest rates that are out there. So, if you if you have a situation where the capital is more expensive, it has a direct correlation to the types of valuations they can put out in the market, which makes it less attractive for sellers like yourself to take the deal. So, it has this kind of correlative impact on slowing things down, lowering valuations, and really kind of degrading the M&A market as a whole, until you start to see a recovery. And then when you do see a recovery, it’s like, it’s like the snap of a rubber band. It’s like instantaneous, and it’s off to the races, which is really what we’re kind of starting to see the wind up to that and firmly believe that that we’re well on our way to a nice recovery.

Kevin Cumbus

Well said. And frankly, we need it because inside of businesses across the United States, but specifically in healthcare businesses, covid was hard on these businesses from an employee perspective, right? We had the great resignation, then we had wage inflation, and that’s really what graph number two is all about, are these inflation trends that inflation shows up in profitability or a lack of profitability. So, if you were out in the market recently, you saw likely lower valuations upon a lower EBITDA than you had back in 2020, if your business just stayed flat, from a revenue perspective. That did not feel very good.It’s our expectation, as Josh just shared, valuations are going up, and hopefully more than enough to offset any EBITDA deterioration that you have suffered as a result of these inflationary trends that we’ve seen really since, since covid. Josh, anything else to add on this one?

Josh Swearingen

Yeah, actually, there are two, I think, really significant points here that I want to point out. I think one, this has played out, you know, obviously this plays out in in the consumer side, because the consumer now has less expendable, you know, disposable cash flow to utilize for services like dermatology services, especially if you have an aesthetics portion of your business. But, but really, across the board, they’re not spending as much capital for external processes. And then, you know, I think in your, within your team itself, you know, these hit your team pretty hard. So when their day to day life is impacted by inflation and a reduction in quality of living, they’re going to look for a raise, or, if you can’t provide the raise they’re looking for, they’re going to look for an opportunity to make more out in the market, and because of the short shortage of potential providers that are out there, there’s a market for these people. So, I think a lot of this has played really kind of a nasty role in a lot of the turnover that’s been experienced over the last couple of years, raising wage inflation, which has been reasonably significant in the healthcare space, which has had a deleterious effect on EBITDA.

Kevin Cumbus

Yeah. I mean, inflation has been hard, and, you know, they’re targeting to get down to 2% even that is inflation, right? So, costs aren’t going down, we’ve just got to decrease the rate at which they are going up. That’s what the Fed is targeting.

Josh Swearingen

Yep.

Kevin Cumbus

Well, let’s zoom in, we’ve been hanging out at 10,000 feet, let’s see if we can zoom in a little bit here. Josh, give us, kind of an overview. Where do you want to take this?

Josh Swearingen

Yeah, I mean, I’m excited. I think, we’ve done these, these updates, a couple of times now over the last couple of years, and it’s really been an interesting conversation. It’s always interesting. I remember last year at this time, when we did this update, we had a really good feel for a lot of interest rate drop and kind of an anticipation of the market really taking off. That hasn’t really materialized, in large part because, you know, we had interest rates that have remained pretty high throughout most of the year, and we had tariffs that came into effect, and nobody really knew what to expect from those and that uneasiness in the market has really kept a lot of the buyers on the sidelines and impacted a lot of the prospective sellers that are out there as a result of that. So, you know, I’m super excited heading into 2026 just based on a lot of the signs that we’re seeing, not just on a macro level, economically, but really on the buy side, and how the buyers are tooling up their development teams, that speaks really well of what their mentality is going into the year.

Kevin Cumbus

That’s awesome.

Josh Swearingen

So, I really like this graph, because it really kind of digs into the types of dermatology deals that have existed. And we’re seeing, you know, initially we saw a large number of kind of PE backed groups that were formed back in 2018 and that process really continued through, really through 2023 we saw a dip there through 2019 and 2020, which were obviously the covid years, but then a pretty rapid recovery through 2023 in M&A activity across the sector as a whole. And then as really, largely, as a result of inflation and interest rates, we’ve seen a pretty significant decline over the over 2024 and then year to date, 2025 I feel. And based on, you know, everything that we’re reading, that we’ve really hit a bottom. The activity has picked up significantly, really at the end of Q3 and in Q4 of 2025 and we’re having more and more conversations, not just with buyers, but a lot of conversations with prospective sellers who’ve been kind of sitting on the sidelines, waiting for a little bit of a recovery, understanding that the market would follow shortly thereafter.

Kevin Cumbus

Yeah, I think this speaks to that frothiness of the market, that pent up demand, and also probably a realization by many of the folks on this call this evening of saying, you know, “I was going to hold on for one more year and then sell. Hold up for one more year and then sell.” We talked to so many operators who say, “Look, I’ve reached a point where I have the money I need to retire. I’m ready to transition the business. It’s been a hard operating environment, and I really don’t know if I see an end in sight, and I’m looking for someone to help me, help my team, make sure the practice survives going forward. And it really feels like an MSO is where I want to go.”

So, I think you’ve got two unique forces here, increased demand from the sellers to find a partner, and then we’ve already talked about the buy side, but we do receive more and more calls that sound like that, than we ever have in previous years.

Josh Swearingen

Yeah, I agree. And one point, and this is specifically about the buyers, one thing that I do want to point out, you know, I think that you know when you see a cycle like this, a seven year cycle, and really, if you look back at the dermatology consolidation historically, you know whenever you have, whenever you have a an industry that starts to consolidate early on, in the beginning stages, you’re going to have groups that form that really likely didn’t have any business forming. And I think that they’re, you know, there’s a lot of noise in the dermatology space about these kinds of bad actors in the space, and how doctors’ equity has been treated, how they’ve treated providers and clinicians, things like that over the course of the transaction. And I think the great thing about being in a much more mature environment, which is where dermatology has come to over the last couple of years, is that we’ve got a lot of really good, solid buyers with really good backers, private equity backers, that have a lot of experience in the healthcare space in other verticals, and have done this the right way.

Kevin Cumbus

Yeah.

Josh Swearingen

And I think that, you know, a couple of the conversations that I regularly have, you know, with prospective clients are, “Yeah, we understand that there, there is some bad, you know, bad news out there about some of these prospective buyers, but there are a lot of really, really good buyers out in the space that are exactly the type of organizations you would want to partner with.” And really weeding through that process and going through a represented and competitive process helps you figure out who those are.

Kevin Cumbus

Yeah, that’s a great call. You know, I’d say bad news travels very, very quickly. Good news does not, it’s like, there’s one, one bad apple, and everybody is writing off the entire, I think some people are guilty of writing off the entire industry.

Josh Swearingen

Yeah, very well said.

So, who are today’s buyers? Well, I mean, you’ve got well known and established MSOs that are out there. We’ve all heard their names. You know, some of them have been around for a very long time. Some of them have only been around for seven or eight years, but a lot of them are based on, you know, the graph that Kevin showed earlier about organizations that are getting ready to go through a recapitalization. A lot of those organizations are hitting a point where they are looking at finding another capital partner within the next couple of years. Number two, you have upstart MSOs. These are the ones that have formed, really, over the last couple of years. I would say that this represents a pretty reasonably good size of the market. These are a lot of the late entrants that have kind of taken advantage of the post-covid environment and built really nice organizations on the heels of that, and in many cases, were able to get into the dermatology space at somewhat of a discount because of the timing of their organizational other entrance into the space.

Kevin Cumbus

And the other thing I’d add about these guys, Josh, is they’re built on more expensive debt, more than likely, and their balance sheet is going to look a little different. And if you were an MSO that was built back in 2019, with the expectation there’d be cheap money forever, it’s questionable how that equity, or if that equity, is ever going to be able to turn to cash. And we know the ones that we would bet on, and we know the ones we would not bet on.

In bucket number two, it’s just interesting to me that to see how will the returns be as good because the highest trade environment, will they be able to pay as much over time? We’ll see, we will see.

Josh Swearingen

No, I think that’s a great call out. And I think it really harkens back to the to the previous graph that you showed of organizations that are kind of waiting for a recapitalization event. I think you’re right. I think you have a lot of organizations that were formed pre-covid, that thought money was going to be cheap forever, and then when it wasn’t, have had a really hard time getting through any sort of a sale event or recapitalization event, because the balance sheet does not look good based on current rate environment. So yeah, very interesting.

And then, obviously, I think, I think one of the more interesting ones, there’s still a lot of private capital looking to enter the market and find their initial dermatology platform investment. So, I think Kevin mentioned it earlier, but these are usually organizations that are going to be around $3 million in EBITDA with some developed management infrastructure in place. But they’re, you know, we’re approached by, I probably get approached by a couple of PE groups a week, asking, you know, if, if we have anything in the pipeline that would be an investable asset on the in the dermatology space. So, for those of you running, you know, nice, larger businesses, it’s a really interesting conversation to have. It’s not for someone who is looking to exit that business in short order, but for someone who’s entrepreneurial, who wants to put their stamp on the space and potentially build something really large and really exciting, it’s a really cool option to take a look at

Kevin Cumbus

Awesome.

Josh Swearingen

And then different types of equity structure, you know, it’s really kind of fun operating in multiple healthcare environments, because we get, we get a chance to see a lot of things in other verticals, other more mature verticals, and then kind of insinuate to some of the prospective buyers, structures that have been very successful and structures that haven’t, and get them to consider some of the more successful ideas that are out there.

So, hold co is pretty standard. It’s pretty traditional. You know, if you have an organization that you partner with, and they have 7, 10, 15 locations, hold co would be equity in all 7, 10, or 15 locations. You essentially are receiving shares in the broader parent organization. And the value of that appreciates as the organization grows, and then eventually, when they go through some sort of an equity event, you can get what they call the second bite of the apple, and you can resell those shares and hopefully tag along with all of that growth and potentially the arbitrage that they have experienced in your own way.

Kevin Cumbus

There’s one thing on hold co, you want to make sure that the equity that you take is pari passu to the equity the private equity company has, and that the management team has. Pari passu is just a Latin word for “is of the same class.” What you don’t want to be doing, what you don’t want to be stuck in, is a sub-optimal class that doesn’t have the same rights that their shares do.

Josh Swearingen

Yeah. Great call out.

Now the other is joint venture. This is a much newer structure that we’ve actually seen in a couple of other verticals for a while, but are just now starting to see in the dermatology space and medical aesthetics broadly. This is essentially a partnership with the buyer, so they may come in and buy 60% of your business, and you retain 40% of it. And the benefit for this, especially for younger, entrepreneurial clinicians and owners is that you can maintain, you know, upwards of 40% of the ongoing profit cash flow from that business, and this allows you to receive essentially ownership compensation while de-risking taking chips off the table and having a really, really good partner helping to run some of the back office operations and provide some of those larger synergies that are only going to help your profitability anyway.

Another really nice option with this is, in many of these organizations, because they’re so growth oriented, they’ll allow you to open additional practices under this joint venture partnership structure. So, you may have a 60/40 split with the buyer or the partner that you’re with, and then you open another location, and it’s 60/40 there. Not only are they taking on most of the capital risk and a lot of the operational risk, but they are helping to they’re helping you continue to build your brand out, build that pool of profit dollars that you’re pulling from and ultimately, you’ll have some level of clinical oversight of the business, more than likely. So, it’s a really nice option for entrepreneurial young clinicians who are looking at kind of expanding their footprint but really want to partner to help them do that.

Kevin Cumbus

Yeah, I like this one. It really, it harnesses the power of the strategic investor, the smart money, with the entrepreneurship of the of the of the provider who’s got a long runway to go it. This creates great win scenarios.

Josh Swearingen

Yeah, and I do, and I also another call out on that is, you know, in any type of a situation, you know every organization is a little bit different, and stock and equity are never a guaranteed thing, and the timing of it is never a guaranteed thing. And you may be willing to roll the dice, and we certainly do a lot of vetting to ensure that the businesses that you’re partnering with are well established, well capitalized, or have a good history of performance. But you know, as we’ve seen, interest rates, environments can change. A timeline can change. And if you’re looking for liquidity, you know, even the best actors may have delays in that process based on things that they cannot control in the macro environment. So, I think the nice thing about joint venture is that, yeah, there’s an eventual kind of cash out at the end when you sell that that particular piece of equity, but at the very least, you’re still maintaining profit share every step of the way. And as long as you’re in that joint venture relationship, you continue to retain some of that profit, those profit-sharing dollars, and that’s a really nice hedge on the overall risk of the deal.

And then, yeah, and then hybrid is, I mean, it’s essentially just a hybrid of both. And I think there are a lot of organizations that are looking at this and going this direction, where you have a chunk of equity that is in the parent company, you have a chunk of equity that is in the joint venture partnership with the buyer and that allows for flexibility on both sides and additional upside on both sides.

Kevin Cumbus

It’s all about alignment and risk sharing, right? And everybody’s appetite for risk is different, and that’s why these, these unique opportunities or tools with respect to structure, are so important. Some of our clients say, “Listen, I’m playing with house money once, once this deal is done and I get the cash at close, yeah, it’s great to have it, but I don’t need it. Let’s roll the dice with holdco. I don’t need distributions. I want to get a 4x return on the world equity,” whereas others say, “I don’t need the, I’m not looking for the return. I’m looking for the cash flow.” And that’s really what these tools allow you to do. And Josh models these out with our analytics team, and we’ll look at 5, 10, year cash flows that you can then share with your financial advisor, share with your tax accountant and say, what makes the most sense for me, given what I want to do operationally in the practice, and frankly, what my personal balance sheet looks like. So, I love the structure side of this, just like you. I love it.

Josh Swearingen

This is really, it’s kind of, it’s probably the my favorite part of the job, of kind of sorting through all the various intricacies of each LOI, because every LOI is completely unique. Every buyer is completely unique. Every seller is completely unique. And trying to make the perfect match, and that really is the challenge and the fun in the job.

Josh Swearingen

So, so, you know, we talked touched on this briefly earlier, you know, MSOs and private equity groups all, you know, there’s a common saying out there, if you’ve met one MSO, you’ve met one MSO, and there are dozens out there, and all of them are completely unique. And they’re unique in their internal structures and the supports that they offer, how they’re built, what they’re how they’re looking to grow the type of doctors they partner with, across the patients that they attract, the payers they work with. I mean, across the board, they’re all somewhat unique in their own way. And I think that it’s important to understand that seeing a broad expanse of buyers is a critical part of this process and really understanding the options that you have in front of you to make the right decisions for the next stage of your career. And we’ve gotten to a point where you’ve got a lot of really, really good, solid prospective buyers in the space, buyers that are going to respect the culture that you’ve built in the business. They’re going to respect your patients and your colleagues. They’re not going to dictate treatment planning. They’re not going to come in and fire your team members, and they’re not going to tell you how to run your practice. They’re really going to operate as a partner in the business and try to find out ways to accentuate the things that you’re already doing, reduce overhead, overall costs, provide a better working environment for your team members, better benefits, things of that nature, and in return, they’re going to pay you a premium for your business versus, you know, what the rest of the market may be able to pay in a doctor to doctor trade. So, there’s a really nice trade off here. And if you find the right partner, or when you find the right partner, it can be a match made in heaven.

Kevin Cumbus

Yeah, I think for also the individual who wants to, like, take the chips off the table and also have a glide plane into retirement, I know in talking to my father, who was a dentist, and other healthcare providers, many of them absolutely love what they do, but they just don’t want to keep up at the same pace, so going from five days a week to four days a week to three days a week, and maybe just filling in on the back end, rather than selling your business, throwing the buyer the keys and walking away from something you’ve been doing for 30, 40, 50 years. I think this is a really, I would say probably more enjoyable way to exit the business that you built.

Josh Swearingen

Yeah, I couldn’t agree more. So, benefits in a changing environment. I mean, things that we’re really kind of focused on are, what is the work life balance going to be for you post-close? How does this look, not just in the immediate transaction and in the immediate, you know, three to five year working period post-close, which is what most private equity backed groups are going to ask of you. But what does it look like beyond that? Is there an opportunity for continued growth? Is it somewhere you’d be interested in continuing to work, or is this a, you know, work your five years and ride off into the sunset? So those are, you know, kind of things that we really focus on when we’re getting to know you and getting to better understand what you’re looking for.

I think one of the biggest things that I hear from prospective buyers is, you know, they really want to step away from the administrative support. They don’t want to have to deal with the back office operational aspects. And I think that can have a huge impact on your work-life balance.

Growth and development, collaborative community, clinical autonomy, all of these are things that most of these groups will provide and are inherently providing to the groups that they partner with, really to the betterment of the group as a whole.

You know, when you go through a transaction like this, there’s, there’s an element of it that is the, you know, the wealth creation, there’s an element of it that’s risk mitigation, retained ownership, all of these kind of play into I think that, you know, from our perspective, you were really trying to dig into, you know, what are you looking for in this transaction? Are you are you looking to cash out a significant amount of significant number of chips? Are you looking to take a bunch of chips off the table on that wealth creation path? Are you really just looking to get rid of kind of the administrative, you know, hassle that you have and just make your life easier for the next couple of years? Are you mitigating risk in an expansion process or in an attempt to grow the business as a whole? Do you want to continue retaining ownership? And then ultimately, as Kevin just spoke, you want to secure your exit strategy for you and your patients and your team members. I think all of these are things that are significant considerations in the process, and topics of conversation that we will have throughout the entire process.

Kevin Cumbus

I can see why your clients need you Josh, like there’s a lot going on here, and if I’ve got to think through all this on my own, I’m probably going to forget something. I’m just not going to live in all of these worlds. So, to see that you got it laid out here for your clients to go through this emotional and financial and operational journey, I know gives them comfort.

Josh Swearingen

Yeah, I think, you know, it’s, it’s always an interesting conversation, because, you know, there everybody at the front end thinks they know what they want, and they want to take the highest offer, and you know, this and that and the other. And the reality is that the highest offer may not be the best offer, and I would say that 9 times out of 10, most of our clients don’t take the highest offer because, you know, you’re looking for a lot of different factors. And as you get into the process and you speak with prospective buyers, and you work through our process with us, and we get a better feel for everything, it really changes your perspective from “All right, what’s that upfront number” to “All right, what is the next three to five years look like? How does this work its way through?” And you know, and “Is it a process I’m going to enjoy?” Because in any type of a private equity transaction, you’re married for a few years post close, and you really want to make sure that you’ve got the right the right partnership.

Kevin Cumbus

Yeah, it always makes me happy when y’all share that one of your clients chose a deal that was not the highest offer, because I know at that point that client of ours gets it and they understand that it’s cash flows, not enterprise value or multiple.

Josh Swearingen

Yeah, yep, completely agree.

So which dermatology practices received the best deals? We’ll just tick through these really quickly. I mean, really for a larger strategic buyer, a larger group, MSO, they really like practices that are in that $2 million plus in revenue, with at least $300,000 in EBITDA, I think that’s probably the baseline. One of the things that we like to do is, you know, when we have prospective sellers come to us, we’ll run a free valuation of your business for you. We’ll give you a baseline EBITDA number, give you an idea of where we believe that will fall in the market, and you know what the buyer pool might look like. So you have, you can make an educated decision about whether or not it’s the right time to go through this process, and I think that’s really, really helpful in ensuring that, you know, when we take a business to market, we know that we’re going to have a pretty solid group of buyers, but as a whole, roughly $2 million in revenue with $300,000 in EBITDA is a really nice baseline to work off of. In the dermatology space, multiple providers is an absolute necessity. Really having multiple doctors in the practice, maybe a mohs surgeon available at least part time, but hopefully full time within the business. All of those are huge value adds for the prospective buyers. They eliminate what we would call “key-man risk” when they can spread, you know, production out across multiple providers, and that includes your mid-levels as well. You know your nurse practitioners and your nurses potentially on the aesthetic side as well, but having multiple providers is a huge help diversified service offerings.

We touched on this really, really early on. You may be a medical derm practice that does some mohs surgery and does a little bit of this and a little bit of that. Those are all fantastic. Ultimately, at the end of the day, what a lot of these prospective buyers are looking for are kind of untapped markets. So, and that’s not just a geographic description, that’s literally site level within your business, where areas that we can potentially, without disrupting the core business, add offerings that will drive revenue or profitability or potentially improve provider satisfaction in the business, because they’re able to do more things.

Kevin Cumbus

Yeah,

Josh Swearingen

And then the clean compliance and risk profile, you know, clear documentation, really, this is a big, a big thing in the industry right now, but proper supervision of mid-levels and documentation of that supervision, very, very, very, very critical. Sound building practices with your payers, no major payer or regulatory issues to speak of. So, all of those are nice things that you can kind of just work through. And if you do have some issues with that, clean those up ahead of a go to market process.

Kevin Cumbus

And look that we’re throwing a lot at you here in a short period of time, if you say, “Hold on, I need more,” we’re going to provide you our contact information at the end of this into this presentation. Again, our goal is that you leave tonight with more information than you came in with, and that you build a practice that’s built to sell whether or not you ever sell it.

Josh has headwinds here. The reality is, it’s not all up and to the right every time, Josh, there’s always headwinds in every industry. What’s dermatology facing now?

Josh Swearingen

Yeah, I mean, I think that one of the biggest, and this is from a regulatory standpoint, this is what a lot of the buyers, in some large part, because they’ve run into issues with this, are, are how the billing is handled for specific providers. We were running into a lot of practices that are billing everything underneath the primary doctor provider with the payers, and that’s just simply not allowable in most states or many states that I’m aware of. So, you know, that’s a big red flag for a lot of the organizations. And quite frankly, when we’re running a financial analysis of the business, it’s something we have to dig into, because there’s a really high degree of likelihood that if it’s being improperly billed, it’s being done so because the, you know, the mid-level that it should be billed under, might have a lower reimbursement rate, or something like that. And that is, you know, the way a private equity group is going to look at it this is, you know, if we are to do everything completely the right way, what does this business look like after we take it over? And they have to take that into account. So, I think that’s one of the bigger headwinds, primarily because it’s become a hot button over the last few months. Everybody’s looking at it right now.

Kevin Cumbus

Can I just say one more thing about that? You actually have two risks. One is like legal risk, right? Because you’re doing it inappropriately. Could be fraud. And then the second, not as obvious risk is character risk, right? So, we’re going to have to own this at some point, and we’re going to have to correct it, and then you’re going to get asked the question, and the answer could be, “Oh my gosh, I had no idea.” But look at this today, because that’s a major headwinds, not just to your EBITDA, but to the character.

At the end of the day, our private equity companies are partnering with people, not just businesses. You’re a people centric business, and they really want to partner with great folks.

Josh Swearingen

Yeah, no, very, very well said, Absolutely, well said.

Other thing, unreconciled financials, you know, incomplete error reconciliations, inconsistent revenue recognition. Try to have clean numbers. Work with an accountant that understands how to build out your financials properly. You know, we can give you some preliminary feedback when we run evaluation for you of what your financials might look like, but you know, within the process, if we get this far, a quality of earnings team is going to be bought in as a third-party accounting team that’s going to do a deep dive into everything. And if your financials are a mess, it will just again for the reasons Kevin just mentioned, it’s going to cause them to pause and question some of the things going on in the practice. And it may cause them to question some character if there’s anything kind of off color going on.

Kevin Cumbus

We just want you to be able to deliver financials on the 15th or the 20th of every month. We want you to present yourself as the amazing business owner that we know you are. And if there are little chinks in the armor, the antenna is going to go up on the buy side, and they start to wonder, “I wonder, what else is going on inside the business?” And we don’t want the antenna. We want people marching towards closing under your deal.

Josh Swearingen

Yeah. And similarly, sudden staff departures. I think this is this is this has hit the industry really hard over the last year and a half, but losing key providers within this process is very, very difficult to overcome, and in often cases, will cause adjustments to an offer if you have key providers who could potentially be taking patients with them as well. So, you know, make sure you have your house in order, make sure you have a happy team, throughout this process, the buyers are very, very cognizant of the team members, and they do a really, really good job building packages and communications that that will get your team, in many cases, very excited about the prospect of a new partnership and the opportunities that that may present. So, keeping everything intact through it, throughout the process, is critically important.

Kevin Cumbus

Josh, what I like about these three bullet points is, actually, can control the some of the outcomes here, right? Sometimes headwinds that you’re facing are out of your control, and you just kind of kind of adapt and change your strategy. These are things that you can control inside your business and should analyze and take control of as you’re thinking about a potential sale.

Josh Swearingen

Yep, 100%.

So, what can we do to prepare and capitalize? You know, understand the value of your business today. I think the best way to do that is to get a valuation done. And as I mentioned, you’ll see a QR code on the back end of this presentation, but we’re happy to provide you with a valuation based upon where the market is today, and then, you know, have a long an ongoing conversation. I think one of the most successful endeavors that we are, or all of the most successful endeavors that we have, are when we communicate with a client, prospective client, early on, are able to give feedback, give them a good feel for the market is, and then allow them to, based upon what their goals and their needs are, work on the business for a few months, heading into a process. You know, we can take six months of updated financials, if there are changes made, and roll those forward and pro forma those, take those to market and get credit for them on the back end. So, I think that’s really a valuable offer that we hope you’ll take advantage of.

Through that process, you know, determining what your what your path is going to look like. Do you want to sell the business? Do you want to partner with the business? Do you want to work on the business for a couple of years and then go to market? And understanding, again, at the base level, what the valuation is and how that valuation can play out over a five-year time span is a critical part of making that decision.

Backwards plan to account for post-sale commitments, if you’re sitting here listening today and you’re a year away from full retirement, you have waited too long. You know, most of these buyers really would like a three-to-five-year commitment post close. It doesn’t mean that we can’t work around it and there are certain, certainly certain situations we’ve operated in where we do have buyers that want an immediate exit, it just limits the buyer pool, and really requires that we only look at a certain segment of buyers who can easily backfill you so and it also reduces the value of your business. So, if you think you’re three to five years away from trying to retire or really slowing down, now is the time you should be looking at a process, a sales process.

Kevin Cumbus

One other thing to tack on here is investors are getting more and more savvy, frankly, about age and retirement, and ability, and they’re being taught this by the buyers. One of the most important numbers they print inside of their book is they go to market to educate private equity comes about the business they built, is the average age of their providers, and they really want that number to be as low as possible. This is not ageist. This is really about managing risk. So, you know, if you’re 55 to 60, and you think you may, you may want to work five to seven years. Let’s go ahead and have that conversation. If you’re 60 to 65, we need to be talking today. If you’re 65 to 70, let’s have a quick conversation about how we can maybe have you scale back a little bit and replace your production with a younger doctor. There are ways we can get your business sold, but, but we need to be talking with you today, the older you are.

Josh Swearingen

Yeah, very well said. This, this often doesn’t get done until it’s almost too late in the process, but have a conversation with your wealth advisor. I can’t, can’t tell you how many times I talk with prospective clients and ask them kind of what their number is. You know, what do you need out of this transaction to live the next phase of your life comfortably? What are you looking for? And in return, I receive a blank stare. Have a conversation. And if you don’t have a wealth advisor, we’re happy to recommend a couple of really good ones. And I’m not, I’m not downplaying, you know, a financial advisor who handles your 401K, but I’m saying, you know, there are real Wealth Advisors. There’s going to be huge tax implications to this transaction. They’re going to be significant amounts of rollover equity probably tied into the to it, and as well as a really large cash outlay at the front end relative to the size of your practice and understanding what that process is going to be and what you need out of this transaction is critically important to make decisions down the stretch.

Kevin Cumbus

Awesome.

Josh Swearingen

And you know, obviously we are happy to provide you with as many references as you would like. We will inundate your inbox with names of very, very happy past clients, and we would welcome you to talk to any one of them about their experience and the process that we ran for them.

And legal preparation, you know, this goes back to, you know, one of the headwinds from earlier, just make sure your house is in order. You know, make sure that you have an existing lease in place, employment agreements in place, where you can proper oversight all of that kind of stuff set up. Just, just keep your house in order, and you won’t have any problems on that on that side of it.

So, and then this is my favorite of all of the bullet points. But, you know, be first in line to capitalize on market improvements. We really anticipate we’re going to see an influx of activity over the next six to eight months, especially, really next 6 to probably 18 months, but the next six to eight months, especially, as a lot of these groups that have been sitting on the sidelines have to fulfill their investment mandates, and I think that provides a perfect environment for a seller to walk in and drive premium value for their business and really get a lot of things that they want to ask for that they ordinarily might not have.

Kevin Cumbus

Honestly, Josh, as you’re going through this, this whole page is about, why not to take an unsolicited offer. Because if you do that, and you haven’t done these six things, and you’re not prepared, you haven’t set up your trust, and you haven’t set up your wills and your estates in a way that’s going to save you tax dollars, it’s not just the money you’re leaving on the table with enterprise value. It’s the additional taxes you’re paying and on and on and on.

Josh Swearingen

Yeah.

Kevin Cumbus

So, it feels like I probably need a year to work with my financial planner, my attorney, my real estate attorney, working with TUSK to truly make sure all the stars are aligned. Where I can go to market with 100% certainty of what I need to get a deal done.

Josh Swearingen

Yeah, I love it when you say this and you say it all the time, you get one opportunity to sell your life’s work, and you spent your life building your life’s work. So don’t, don’t short sell yourself on the back end of it. Make sure you’re getting educated and you’re doing the things you need to do to maximize value and protect, protect the wealth that’s created as a result of it.

Kevin Cumbus

Well, Josh, I’ve so enjoyed our conversation this evening. I’m sure people will have additional questions and want to learn more and dig in on, “Hey, I’m three years away. I’m five years away,” and there’s a playbook for that. So, so here’s just as Josh referenced, this is the QR code. If you pull out your phone, it’s a picture of this. Go ahead and fill out the form, and we’ll reach out to you to perform a complimentary practice valuation, share with you what’s going on the market and what it could look like on the other side of a partnership. And finally, if you need our contact information, you can reach out to us at [email protected]. I’m simply [email protected], and Josh is first name [email protected].

Thank you, Josh and thank you all for making time for us. Hope you all have a wonderful rest of your evening.